China finds huge violations in audit on local debt

China said Wednesday it had uncovered 530.9 billion yuan ($84 billion) in misused funds in an audit of local government debts, as it moves to clean up "problem" financing. Local governments, which are banned from borrowing directly from banks, have set up financing vehicles to fund infrastructure and other projects but growing debts have fuelled concerns about a potential explosion in bad loans. The audit, which covered the year 2010, found numerous violations by these local financing vehicles, including funds illegally diverted to property and the capital markets, and "fake" investments, the National Audit Office said. The financing vehicles also provided loans secured with improper collateral and failed to make proper use of funds, the agency said in a report posted on its website. Nearly half of the misused funds, around 259.2 billion yuan, had been resolved, the report said, though it did not elaborate. The central government has moved to "rectify" problematic local debt through tighter management, regular reviews and financial support for cash-strapped local governments, the state auditor said. In October, Beijing said it would allow Chinese cities and provinces to issues bonds, ending a 17-year ban, to give local governments a funding boost. Last June, Beijing put the debt held by local governments at 10.7 trillion yuan at the end of 2010 -- or about one quarter of China's 2010 gross domestic product (GDP). Several provinces later published reports that showed their debt-to-GDP ratio was higher than the national figure.